Fed announces CCAR, capital buffer changes

Beginning in the 2019 cycle, the Federal Reserve plans to limit its use of the “qualitative objection” in its Comprehensive Capital Analysis and Review (CCAR) process. The Fed also voted to hold the countercyclical capital buffer for banking organizations using the Basel III advanced approaches at 0 percent and released instructions for the 2019 CCAR exercise.

Qualitative objections are issued when a firm subject to the CCAR process under the Dodd-Frank Act fails to demonstrate that it has sufficient capital to: withstand a severely adverse operating environment and continue to be able to lend to households and businesses; maintain operations and ready access to funding; and meet obligations to creditors and counterparties.

The Fed makes such determinations based on supervisory and company-run stress tests conducted under the agency’s rules implementing sections 165(i)(1) and (2) of Dodd-Frank Act Annual Stress Test (DFAST) requirements.

DFAST requirements were amended by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) so that banks with between $100 billion and $250 billion in total consolidated assets only are mandated to participate in supervisory stress tests. The Fed has discretion to apply other individual enhanced prudential provisions to such banks as well. Banks with assets between $50 billion and $100 billion no longer are subject to enhanced stress-testing requirements.

Under the final rule, firms that participate in four CCAR exercises and successfully pass the qualitative evaluation in the fourth year will not be subject to the evaluation going forward. If a firm fails to pass its fourth-year evaluation, then it must continue to be assessed for a possible qualitative objection until it passes. For firms still subject to the qualitative objection, their fourth year generally will be the 2020 CCAR cycle, the Fed noted.

Five of the nation’s largest banks, all with overseas parent companies, will be subject to qualitative assessments during the 2019 cycle, according to the Fed.

The 2019 CCAR exercise will involve 18 of the largest banks in the country with substantial trading or processing operations. Eleven banks will be required to factor in a global market shock as part of their scenarios, and 13 firms will be required to incorporate a counterparty default scenario.

The American Bankers Association (ABA) long has advocated for the qualitative objection component to be eliminated from the CCAR process.

“We view the proposal as an important advance to reaching these ends,” ABA wrote in June 2018. “We support the basic concept of the integration of the spot and stress capital frameworks to align regulation and supervision more closely with the way banks actually manage their capital requirements. Moreover, we note that the proposed changes to balance sheet and capital distribution assumptions better reflect actual bank practices in times of stress.”

Except for any firms that receive a qualitative objection in the immediately prior year, the Fed stated that it would no longer issue qualitative objections as of Jan. 1, 2021.

The countercyclical capital buffer is used by the Fed to gradually raise capital requirements for internationally active banking organizations when the agency identifies a risk of statistically significant future losses.

ABA has opposed the use of the countercyclical capital buffer, stating in the June 2018 letter, as well as in previous comment letters, that countercyclicality already is addressed through the U.S. stress testing regime.

“The countercyclical capital buffer is a signal example of how the Federal Reserve’s efforts to be ‘Basel compliant’ lead to redundancy,” ABA wrote. “The countercyclical capital buffer should be removed from the capital framework, because both the countercyclical capital buffer and the stress testing scenarios are intended to operate in a countercyclical nature. Historically, and under the proposal, multiple elements of the stress testing framework are countercyclical in nature.”

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The Federal Reserve Board, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. have issued information on the host state loan-to-deposit ratios, which are used to determine compliance under Section 109 of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Review the ratios in Dodd Frank Update’s Library.